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Bad News is Good News for VRMs

interest-rate-newsHundreds of thousands of borrowers with variable-rate mortgages (VRMs) are rooting for prime rate to stay low.

For those people, this past week’s dreary economic data had a silver lining. Mortgage rates generally move with economic growth expectations, and those expectations dimmed this week. That led more economists to push back their forecasts for the next rate hike (yes, again) to 2014.

And it is because of headlines like these:

  • Thousands of Jobs Eliminated:  The mother of Canadian economic reports is the Labour Force Survey. On Friday, it revealed that 22,000 jobs disappeared in January. The market was expecting 5,000 net new jobs. “Were it not for the increase in the ranks of the ‘self-employeds’ (+24K), the overall tally could have been much worse,” National Bank Financial (NBF) said Friday.
  • Permits Dive off a Cliff: Building permits posted their biggest 2-month drop “since the data series started in 1989,” says Reuters, that attributes it largely to mortgage rule tightening.
  • Housing Starts Stumble: January housing starts plunged to 160,577, their lowest since 2009 and way below forecast. Construction is “moving back in line with the pace of household formation,” says TD Economics. And NBF notes: “The tighter mortgage rules and the soft economy are having a negative impact on demand and home prices and there are fewer incentives for builders to continue the building spree.”

In a report released Friday, BofA Merrill Lynch added this:

“The employment picture has started to deteriorate, in line with other real activity data such as GDP, housing starts, lower capacity utilization and a persistent trade deficit. Tighter fiscal policy in the U.S., a slowing housing market and increasing U.S. oil production should continue to be a drag on Canadian growth in the near term.”

Add to that a Canadian consumer who seemingly gets more leveraged every quarter, and it sounds like a recipe for weak demand and low long-term rates.

What’s It All Mean

The above sort of talk is usually associated more with rate cuts than rate hikes. But the truth is, no one knows how consumer psychology and external events will shape Canadian inflation and mortgage rates through year-end.

Our best hope for comprehending the infinite factors guiding mortgage rates is to observe the bond market. A yield chart (like the one below) shows how investors have been betting their billions.

For the last few months, the trend in long-term rates has been modestly up. There is, however, little chance of a meaningful jump in fixed mortgage rates until 5-year yields push above 1.55-1.60%—and stay there a while. (Current Quote)

And even if yields do break above that level, few expect enough inflation risk to justify a substantial upward follow-through—at least not in the next quarter or two. For that reason, existing VRM holders have no reason for anxiety just yet.

Canadian-5yr-Bond-Yield(5-year yield chart — Click to enlarge)


The Long-term Relevance, or Lack Of

Any rate analysis is largely speculation. Given the near-random walk of the rate market, rate predictions are mostly irrelevant to a long-term mortgage strategy.

But there is one exception where all this econo-talk and yield discussion proves useful, and that is short-term timing. If you’re timing when to submit a mortgage application (e.g., deciding if you should wait until you qualify for a “quick close” special before applying) monitoring yields can help. But it’s not a perfect science.

If you do make an educated gamble that rates won’t increase before you submit your application, do it with the guidance of a professional, make it a short-term bet, and have your application finished ahead of time. That way, your mortgage advisor can click <Submit> at a moment’s notice if rates turn upwards.

For mortgage closings that are more than ~45 days out, always secure a normal rate hold that’s long enough to minimize your risk.

Rob McLister, CMT